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ASIC v Mariner Corporation Limited

The directors are the people who are responsible for running the affairs of the company. In doing so, they take number of decisions which can be perceived as risky ones, but just because these are risky ventures, does not mean that these have to be avoided. Also, while taking such decisions, there is a need fulfil the statutory duties, which have been provided through the Corporations Act, 2001 (Latimer, 2012). The duties include not misusing the position or information of the company, deploying care and diligence, amongst the range of duties covered under this. Where the provisions covered under this legislation are not fulfilled, the directors can be made liable in both civil and criminal manner (Cassidy, 2006).

Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589 is one of such cases in which the claim was brought for the breach of director duties, particularly section 180(1) of this act. However, these claims failed before the court due to the defence available before the directors in subsection 2 of this section (Jacobson, 2015). This report covers an analysis of this case, along with its different aspects.

The defendant of this case was a corporate investment company, Mariner who wanted to buy either considerable number, or all of the shares in a company, i.e., Austock group Ltd. Olney-Fraser, who was the CEO of the company, got an unsolicited approach on June 08th, 2012 from James Goodwin who had been the joint MD of Arena Investment Management Limited, and this was a company which was part of Morgan Stanley Inc’s international real estate arm. In the initial communication, Goodwin expressed interest in buying Austock’s business unit upon the takeover being completed. In the days to come, after being initially approached, further discussion was undertaken between Goodwin and Olney-Fraser regarding the possible purchase, along with the possibility of funds being provided, for facilitating takeover, from Arena. Even though there was extensive discussion between the two, a binding agreement was not reached. Along with this, none of the directors of Mariner knew about this communication even when the proposals were presented by Olney-Fraser to two of the non-executive directors of the company (Usher Levi, 2015).

A statement was put out by Mariner on June 25th 2012 to the ASX where it was announced that the company had made conditional offer for acquisition of all of the shares of Austock at 10.5% and this offer was described as being an off-market offer.  The board of Mariner was of the view that the value of Austock was around $20 million and this amount was needed for funding of the entire takeover. A letter was attained by Mariner from Austock where it was stated that the offer was invalid owing to the price per share being offered and this led to Mariner increasing the bid by 11% per share, and in order to meet the minimum bid price rule, the amount was increased. The takeover bid of Mariner was defeated as a more attractive offer was put forward by Folkestone Limited. This led to the proceedings being brought against ASIC Mariner and its director for the breach of director duties covered under section 180(1) of the Corporations Act.

Duties Contravened

Section 180(1) is the very first duty which is imposed on the directors and other officers of the company under Part 2D.1 of the Corporations Act, 2011 (Cth) (Gibson & Fraser, 2014). Under this section, a civil obligation has been placed over the directors for exercising the powers which they have and discharging their duties in a manner which shows a degree of diligence and care as would be done by any reasonable person where such person had been a director of the company in similar situation, with same powers and held the same office as the director of the company (Paolini, 2014). In case the provisions of this section are breached, the penalties covered under section 1317E become applicable. This section gives the power to the court to make declaration of contravention which covers the details of the undertaken violation by the director. When this happens, the ASIC can apply for pecuniary penalties based on section 1317G of this act, or apply for a disqualification order based on section 206C of this act (Federal Register of Legislation, 2017).

However, the liabilities covered under section 1317E are not applied where the previsions covered under section 180(2) are fulfilled. As per this section, in case the director of the company makes a business judgment for the purpose of subsection 1 of this section, they would not be liable, provided the judgment which has been made is done for proper purpose and in good faith; provided they do not have any material personal interest in subject of judgment; the directors have informed themselves regarding the issue of judgement in a reasonable manner and believe the judgement is appropriate; and have rational belief on the judgment being in the best interest of the company (Federal Register of Legislation, 2017).

The ASIC had claimed that section 180(1) had been breached by every director of Mariner with regards to acting with due care and diligence as they made a decision which led to Mariner announcing the Austock takeover bid and this resulted in Mariner making a public proposal which breached section 631(2)(b); resulted in Mariner making an announcement to ASX, as a result of which the provisions covered under section 1041H were contravened; provided that the company would bid at 10.5% per share which they could not do in lawful manner based on section 621(3); and lastly, failed in considering the regulatory restrictions regarding the ability of company in acquiring more than different percent of shares in the other company, i.e., Austock (Austlii, 2015). In short, the allegation of ASIC was that the directors of company had breached the governing act when they announced an off market takeover bid as there was absence of requisite funds for undertaking this bed and in making an offer at the price below one required in this act (Addisons, 2015).

Analysis of Court’s Decision

While deciding upon the possible breach of duty of care and diligence by the directors of Mariner, particularly in context of the takeover bid, the court adopted a business friendly approach for the business decisions made by the directors of the company, and in issuing the warnings regarding hindsight while questioning the second guessing of judgment calls. The judges stated that three observations had to be made regarding the case brought by ASIC against the company directors. The first one in this regard was that the directors had expertise and extensive backgrounds in finance, mergers and acquisitions. These backgrounds showed their judgment calls, strategies and assessment of risks which they adopted for the transactions which were the key issue of this proceeding. There was a need to keep in mind that while assessing the case of regulator, the benefit of hindsight had to be given for second guessing such judgments, which required a large paper based analysis for viewing what transpired in a time based manner, and had to be separated from reality of the speed at which such events happen in real life (Prickett & Teo, 2015).

Apart from this, there was a need to look into the transactions which were in question and there was a need to adopt ex ante perspective where a person not only looks at the downsides and possible risks, but also at the possible benefits of the same. In this case, this had been the framework of the directors at that time period.  And this was not something which had to be analysed under section 180 of this act. There was a need for retrospective analysis of the undertaken transaction which if not adopted, could result in overlooking the same at later time period. Lastly, there was no creditability in the evidence given by ASIC for attacking the directors (Jade, 2015).

Additional observations made by Beach J regarding the breach of duty of care and diligence provided the breach resulting in being overturned by business judgment rule. For a director to be held liable for not fulfilling his duties there had to be shown that reasonable foreseeable harm was present to the interest of the company. Again, the question of contravention of this duty was upon the balance between the foreseeable risk of harm to company which resulted from such violation, and the possible benefits which could be attained in a reasonable manner for the company to have undertaken this risk. The court was thus required to look at not only the magnitude and nature of the foreseeable risk of harm, but also at the degree of probability of the same happening, in addition to the inconvenience, expense and difficulty of adopted an alleviating action, and to balance the foreseeable risk of harm against the possible and expected benefits which are expected to be born from the conduct in dispute. The management has to take calculated risks and the very nature of commercial activities involved risk taking and uncertainty. Pursuing an activity required the adoption of the foreseeable risk of harm and just because such risk of harm is present, section 180(1) cannot be deemed to have been contravened. Furthermore, a failed action which had been pursued by the directors of the company, which resulted in the company bearing a loss, could not be deemed as enough evidence for the breach of section 180(1) of this act (Jade, 2015).

In giving their judgment, reliance was placed on a number of cases and one of this was Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1. Referring to this case, Justice Beach reiterated on the reasonableness of the belief of director which had to be analysed by referring to range of factors, which include the significance of business judgment which has to be made; the time which is available for attaining the information; the confidence of director in exploring the  matters; costs for attaining information; the condition of the business of the company at that time, along with the nature of competing demand on attention on the board; and lastly, whether the material information had been available to director in a reasonable manner. The court opined in this case that even when a risk was foreseeable in a reasonable manner, the danger which was posed through this was minimalistic, and the countervailing benefits for the company in pursuing the takeover bid which had been proposed was quiet significant, which majorly outweighed the risks associated with it (Austlii, 2015).

The decision given in this case is an important reminder for the directors regarding the different factors which they have to consider while making the decisions and also is a major step forward with the Federal Court in recognizing safe harbor as had been intended originally when the business judgment rule had been drawn in the Corporations Act. This case also shows that the Corporations Act not only makes the directors liable but also provides them chance of successful defence regarding the decisions undertaken in big transactions, which are not just the decisions in the regular operational issues. This case would allow for the matter to be further explored and even use as a defence in the other matter. However, despite this ruling, there is a need for the directors to be aware of all elements of the business judgment rule (Heading & Wood, 2015).  

This ruling does not cover the decisions where the directors have a material personal interest. This case shows that the burden is placed over the directors on informing them regarding the subject of the judgment. It is also important to note that the business judgment rule is not a defence for contravening the duties covered under other provisions of this act, for instance the solvency obligations, misuse of information and misuse of position. Lastly, the manner of preparing the board minutes and the manner in which these are kept is a topic inviting commentary. It is important in such cases that where reliance is placed on this defence of business judgment rule, the minutes reflect on the suitable consideration of board contemporaneously (Heading & Wood, 2015).

References

Addisons. (2015). Mariner Decision Will Not Affect Takeover Bid Funding Strategy. Retrieved from: https://www.addisonslawyers.com.au/knowledge/Mariner_Decision_Will_Not_Affect_Takeover_Bid_Funding_Strategy837.aspx

Austlii. (2015). Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589 (19 June 2015). Retrieved from:

https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2015/589.html  

Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.

Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from:

https://www.legislation.gov.au/Details/C2013C00605  

Gibson, A., & Fraser, D. (2014). Business Law 2014 (8th ed.). Melbourne, Pearson Education Australia.

Heading, B., & Wood, B. (2015). ASIC v Mariner Corporation Limited. Retrieved from:

https://www.lexology.com/library/detail.aspx?g=870f24b4-10d9-4d90-b7c4-95ef5011ebd5  

Jacobson, D. (2015). Case Note: Directors Successfully Rely On Business Judgment Rule. Retrieved from: https://www.brightlaw.com.au/case-note-directors-successfully-rely-on-business-judgment-rule/  

Jade. (2015). Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589. Retrieved from: https://jade.io/article/398014  

Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.

Paolini, A. (2014). Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.

Prickett, F., & Teo, X. (2015). Mariner decision gives directors of bidders greater latitude when announcing takeover bids. Retrieved from:

https://www.claytonutz.com/knowledge/2015/june/mariner-decision-gives-directors-of-bidders-greater-latitude-when-announcing-takeover-bids  

Usher Levi. (2015). Corporate Directors & the Mariner Decision. Retrieved from:

https://www.usherlevi.com.au/corporate-directors-the-mariner-decision/  

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